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Probability Theory

QM 2010 - Kingston

Overview

Event, experiment, and sample space Addition rule for probabilities Multiplication rule for probabilities Bayes Theorem

QM 2010 - Kingston

Event

An outcome from doing something Two or more events can be clubbed together and spoken of as a single event

Experiment

The activity that produces an event

Sample space

The set of all possible outcomes of an experiment

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Probability

Let A be some event. Based on prior knowledge (classical probability) No. of ways A can happen P[ A] Tot no. of all possible events Based on observations in the past (relative frequency of occurrence)

No. of times A happened P[ A] Tot no. of all possible events Based on subjective estimation

Note: When only 1 event can take place, above probabilities are known as marginal probabilities or un-conditional probabilities

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Let P*A+ be P*Getting head in 1 toss+ *

1 p[ A] 2

No of ways of getting head Tot no of all possible outcomes

7 p[ E ] 8

No of wrong LH Tot no of all LH ** Assuming he is told to go only on 1st floor LH

QM 2010 - Kingston

Let P[B] be P[milk-pouch is bad+

In batches of 200 pouches received in the past, average 3 were found to be bad

3 p[ B] 0.015 1.5% 200

Out of 350 IPOs so far this year, 210 were oversubscribed

210 p[ X ] 0.6 60% 350

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Venn Diagrams

Entire sample space is represented by a rectangle The set of events we are interested in is represented by any closed curve (circle, ellipse, square, etc). If 2 or more events are mutually exclusive, their closed curves are shown not overlapping.

If not (if they can occur together), their closed curves are shown overlapping.

Parts from supplier A Parts from supplier B QM 2010 Parts from all suppliers (sample space)Kingston

From supplier A (sample space) Parts with wrong length 7 Parts with wrong diameter Parts with wrong length AND wrong diameter

(Statistical) Independence

Two events (and their respective probabilities) are said to be (statistically) independent, if the probability of either of them happening does not affect the probability of the other happening. Example

Two suppliers, A and B, have supplied batch of 1000 parts each, of which some parts are known to be bad (defective). Let P[A] be P[picking bad part from A], and P[B] be P[picking bad part from B] Then above events and the respective probabilities P[A] and P[B] are independent

QM 2010 - Kingston

(Statistical) Dependence

Two events (and their respective probabilities) are said to be (statistically) dependent, if the probability of either of them happening DOES affect the probability of the other happening. Example

Consider any 1 supplier, A. Let P[A,1] be P[1st part picked is bad, and P[A,2] be P[2nd part picked is bad]. Then above events, and their respective probabilities are dependent.

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When two events are of interest, we may want to know the probability that both can happen together

P[AB] = P[A]*P[B]

P[AB] = P[A]*P[B/A]

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Example 1

Five families A,B, C, D, E are waiting for a flat allotment from MHADA. Only 1 flat is available, and family will be chosen by random draw. But 2 of the families are retired Navy families, which 2 is not known

What is the probability that flat will be given to family D, AND to a Navy family?

P[D is chosen] = 1/5 = 0.2, P[Navy family is chosen] = 2/5 = 0.4 P[flat to D AND to Navy family] = 0.2*0.4 = 0.08

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8%

20 %

40 %

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OR Probabilities

When two events can happen, we may want to know the probability of either one OR the other happening OR probability of events A & B is written P[A +B] or sometimes P[A or B] If events are mutually exclusive

P[A or B] = P[A] + P[B]

P[A or B] = P[A] + P[B] P[AB]

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Mutually exclusive events Not mutually exclusive events

Parts from supplier A Parts from supplier B Parts from all suppliers (sample space)

From supplier A (sample space) Parts with wrong length Parts with wrong diameter Parts with wrong length AND wrong diameter

In straight sum, overlapping area Required probability is straight sum would be counted twice. So required of the 2 areas probability is straight sum of the 2 QM 2010 - Kingston minus the overlapping area. areas,

14

Example 1

Five families A, B, C, D, E are waiting for a flat allotment by MHADA. Only 1 flat is available, and family will be chosen by random draw. What is the probability that family B or D is chosen?

P[B or D is chosen] = P[B is chosen] + P[D is chosen] = 1/5 + 1/5 = 2/5 = 0.4 = 40%

QM 2010 - Kingston

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20 %

20 %

QM 2010 - Kingston

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Example 2

Five families A, B, C, D, , E are waiting for a flat allotment from MHADA. Only 1 flat is available, and family will be chosen by random draw. But 2 of the families are retired Navy families, which 2 is not known

What is the probability that family D is chosen or a Navy family is chosen?

P[D is chosen] = 1/5 = 0.2, P[Navy family is chosen] = 2/5 = 0.4, P[D is Navy family] = P[D]*P[Navy Family] = 0.2*0.4 = 0.08 Required probability = P[D] + P[Navy family] P[D is Navy family] = 0.2 + 0.4 0.08 = 0.52

QM 2010 - Kingston

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8%

20 %

40 %

QM 2010 - Kingston

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Bayes Theorem

Useful in situations where you know the probability of an event (its prior probability) , but you need a revised probability (its posterior probability), given that some other event has occurred. Example

You know the probability of winning a contract. You would like to know what is the probability of winning, given that one of your competitors bid has been rejected.

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Die 1 P[Sixer] = 40%, die 2 P[Sixer] = 70%

Pick a die at random, and it comes Sixer What is the probability that it is Die 1?

Prior probability of Die 1 = 0.5, Die 2 also = 0.5 For better answer we form following table:

Die Choice P[Die Choice] Die 1 Die 2 0.5 0.5 P[Sixer|Die Choice] 0.4 0.7 P[Sixer from 1 OR 2] =

QM 2010 - Kingston

20

So P[Die 1|Sixer] = P[Die1 AND Sixer]/P[Sixer]

= 0.20/0.55 = 0.364

Similarly, P[Die 2|Sixer] = 0.35/0.55 = 0.636 Conclusion: 1 toss result has allowed us to get better estimate of P[Die 1] (and Die 2). Application: Managers can make better decisions with Bayesian Decision theory using additional information.

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QM 2010 - Kingston

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